Tuesday, August 25, 2009


There's really only one good reason to go into debt: you're going to use the borrowed money to increase your ability to make money, such that you will have more money in the future than if you did not borrow, taking inflation into account.

Borrowing for other reasons is generally dumb. When you buy a car with credit, and pay it off over so many years with interest, you end up with a loss. Maybe you really like the car, and the extra thousands of dollars were worth it to you, but many people don't realize how much they're really paying.

Education is generally a good reason for debt. College is expensive, but college graduates make more money in the workforce. (Graduate school, on the other hand...)

People like to buy houses with borrowed money. You are probably aware of the role this played in the economic catastrophe. There is a draw to home ownership, even with debt, because the house can be leveraged for even more debt. People borrow to get a house, then borrow against the house to get a fancy car or boat. This makes those things greatly more expensive, and increases the risk of defaulting. The most appropriate use of money borrowed against one's home is home improvement. Use that money to make the house more valuable.

I argued about this with an economics professor who said we should be happy that G.W.Bush put the US into so much debt because debt means we have more money for growth. Unfortunately, borrowing a trillion dollars from China so we can bomb Iraq just forces our children to pay a trillion in interest over their lives, and only Halliburton and Blackwater and Lockheed see the payoff. Iraq was not a large enough threat to the US to justify the money spent. It made sense to go into debt during the Cold War under Reagan because the threat to the US could have wiped out future productivity. That kind of debt is inappropriate now, but too many Republicans have betrayed their fiscal conservatism ideology, and instead hemorrhage money on a tyrranical and imperialist security and military structure. That money could have developed our commercial and industrial infrastructure, education system, and given all citizens healthcare for life, which would have greatly improved our whole nation's future productivity, resulting in a net gain instead of a loss. Debt only makes sense when it is for growth, or real survival (not from fake threats hyped up by an administration to justify giving itself more power at the expense of liberty).

So what do you do if you want something, but can't afford it now? Be patient and save up for it, like everyone used to do. Don't be an impatient materialist. Remember that study on delaying gratification with the little kids and the marshmallows? Being able to delay gratification was the strongest predictor of success in life, and the kids who grabbed the sweets immediately were more likely to go to jail and drop out of school. Practice being a better person. Practice patience and financial responsibility. Develop a strong frontal lobe that can inhibit bad impulses and make good decisions. Save up to buy something.

Also, pay attention to whether or not you really need what you want. I know for a fact that you don't need a television, especially not a big flat panel. I also know that you don't need to buy a brand new car. My car is 19 years old, gets 32 mpg, and the annual repair and maintenance bills are a small fraction of what new car payments would be. You also don't need a Coach purse or Dior shirts. If those things are important to you, buy them with cash instead of debt. You also do not need to eat at restaurants. Healthy and delicious meals are very cheap if you make them yourself, and you can make your food unique and interesting.

Behavioral scientists have found that people spend more when they're using a credit card, as if it's not real money if they're not holding the greenbacks. Well, use that to your advantage. Pay for things with cash. See if it helps you be more responsible.

Borrowing money is for real emergencies or real opportunities for future gain. When you go into debt for materialism, you set yourself up for greater loss, and you neuroplastically encourage weaknesses in your brain.

No comments:

Post a Comment